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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 30, 2005
Commission file number 1-10738
ANNTAYLOR STORES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 13-3499319 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
7 Times Square, New York, NY | 10036 | |
(Address of principal executive offices) | (Zip Code) |
(212) 541-3300
(Registrant’s telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding as of August 24, 2005 | |
Common Stock, $.0068 par value | 72,839,500 |
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Item 1. Condensed Consolidated Financial Statements (unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Quarters and Six Months Ended July 30, 2005 and July 31, 2004
(unaudited)
Quarters Ended | Six Months Ended | |||||||||||
July 30, 2005 | July 31, 2004 | July 30, 2005 | July 31, 2004 | |||||||||
(in thousands, except per share amounts) | ||||||||||||
Net sales | $ | 508,684 | $ | 472,634 | $ | 985,130 | $ | 905,880 | ||||
Cost of sales | 267,157 | 222,339 | 500,460 | 402,682 | ||||||||
Gross margin | 241,527 | 250,295 | 484,670 | 503,198 | ||||||||
Selling, general and administrative expenses | 231,064 | 200,364 | 446,797 | 399,689 | ||||||||
Operating income | 10,463 | 49,931 | 37,873 | 103,509 | ||||||||
Interest income | 2,175 | 1,295 | 3,942 | 2,296 | ||||||||
Interest expense | 453 | 1,079 | 868 | 2,749 | ||||||||
Income before income taxes | 12,185 | 50,147 | 40,947 | 103,056 | ||||||||
Income tax provision | 5,046 | 20,060 | 16,837 | 41,223 | ||||||||
Net income | $ | 7,139 | $ | 30,087 | $ | 24,110 | $ | 61,833 | ||||
Basic earnings per share of common stock | $ | 0.10 | $ | 0.43 | $ | 0.34 | $ | 0.89 | ||||
Diluted earnings per share of common stock | $ | 0.10 | $ | 0.41 | $ | 0.33 | $ | 0.84 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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CONDENSED CONSOLIDATED BALANCE SHEETS
July 30, 2005 and January 29, 2005
(unaudited)
July 30, 2005 | January 29, 2005 | |||||||
(in thousands, except per share data) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 252,875 | $ | 62,412 | ||||
Short-term investments | — | 192,400 | ||||||
Accounts receivable | 17,679 | 12,573 | ||||||
Merchandise inventories | 231,334 | 229,218 | ||||||
Prepaid expenses and other current assets | 91,900 | 90,711 | ||||||
Total current assets | 593,788 | 587,314 | ||||||
Property and equipment, net | 479,309 | 434,328 | ||||||
Goodwill | 286,579 | 286,579 | ||||||
Deferred financing costs, net | 1,199 | 1,382 | ||||||
Other assets | 21,876 | 17,735 | ||||||
Total assets | $ | 1,382,751 | $ | 1,327,338 | ||||
LIABILITIESAND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 66,318 | $ | 88,340 | ||||
Accrued salaries and bonus | 9,044 | 21,617 | ||||||
Accrued tenancy | 44,263 | 32,264 | ||||||
Gift certificates and merchandise credits redeemable | 28,898 | 38,892 | ||||||
Accrued expenses | 60,305 | 62,633 | ||||||
Total current liabilities | 208,828 | 243,746 | ||||||
Deferred lease costs and other liabilities | 187,518 | 156,848 | ||||||
Stockholders’ equity | ||||||||
Common stock, $.0068 par value; 120,000,000 shares authorized; 81,607,067 and 80,085,690 shares issued, respectively | 555 | 545 | ||||||
Additional paid-in capital | 710,695 | 669,128 | ||||||
Retained earnings | 469,563 | 445,410 | ||||||
Deferred compensation on restricted stock | (15,071 | ) | (11,746 | ) | ||||
1,165,742 | 1,103,337 | |||||||
Treasury stock, 8,814,912 and 9,453,242 shares respectively, at cost | (179,337 | ) | (176,593 | ) | ||||
Total stockholders’ equity | 986,405 | 926,744 | ||||||
Total liabilities and stockholders’ equity | $ | 1,382,751 | $ | 1,327,338 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended July 30, 2005 and July 31, 2004
(unaudited)
Six Months Ended | ||||||||
July 30, 2005 | July 31, 2004 | |||||||
(in thousands) | ||||||||
Operating activities: | ||||||||
Net income | $ | 24,110 | $ | 61,833 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Amortization of deferred compensation | 4,489 | 3,949 | ||||||
Deferred income taxes | (10,108 | ) | 1,183 | |||||
Depreciation and amortization | 45,624 | 36,801 | ||||||
Loss on disposal and write-down of property and equipment | 512 | 154 | ||||||
Non-cash interest | 183 | 1,676 | ||||||
Tax benefit from exercise of stock options | 8,908 | 5,765 | ||||||
Non-cash compensation expense | 471 | — | ||||||
Changes in assets and liabilities: | ||||||||
Receivables | (5,106 | ) | (2,135 | ) | ||||
Merchandise inventories | (2,116 | ) | (34,219 | ) | ||||
Prepaid expenses and other current assets | 576 | (6,061 | ) | |||||
Accounts payable and accrued expenses | (26,838 | ) | 27,643 | |||||
Other non-current assets and liabilities, net | 34,871 | 10,083 | ||||||
Net cash provided by operating activities | 75,576 | 106,672 | ||||||
Investing activities: | ||||||||
Purchases of available-for-sale-securities | (20,600 | ) | (241,100 | ) | ||||
Sale of available-for-sale securities | 213,000 | 249,175 | ||||||
Purchases of property and equipment | (99,196 | ) | (55,514 | ) | ||||
Net cash provided by (used in) investing activities | 93,204 | (47,439 | ) | |||||
Financing activities: | ||||||||
Issuance of common stock pursuant to associate discount stock purchase plan | 1,623 | 1,527 | ||||||
Proceeds from exercise of stock options | 38,666 | 18,312 | ||||||
Payment of financing costs | — | (22 | ) | |||||
Repurchases of common and restricted stock | (18,606 | ) | (60,869 | ) | ||||
Net cash provided by (used in) financing activities | 21,683 | (41,052 | ) | |||||
Net increase in cash | 190,463 | 18,181 | ||||||
Cash and cash equivalents, beginning of period | 62,412 | 26,559 | ||||||
Cash and cash equivalents, end of period | $ | 252,875 | $ | 44,740 | ||||
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ANNTAYLOR STORES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Six Months Ended July 30, 2005 and July 31, 2004
(unaudited)
Six Months Ended | ||||||||
July 30, 2005 | July 31, 2004 | |||||||
(in thousands) | ||||||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 585 | $ | 1,090 | ||||
Income taxes | $ | 9,142 | $ | 28,630 | ||||
Conversion of long-term debt: | ||||||||
Conversion of Convertible Debentures into common stock, net of unamortized deferred financing costs | $ | — | $ | 123,484 | ||||
Change in accrual for purchases of property and equipment | $ | (8,080 | ) | $ | (2,468 | ) | ||
See accompanying Notes to Condensed Consolidated Financial Statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The Condensed Consolidated Financial Statements are unaudited but, in the opinion of management, contain all adjustments (which are of a normal recurring nature) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. All significant intercompany accounts and transactions have been eliminated.
The results of operations for the 2005 interim period shown in this Report are not necessarily indicative of results to be expected for the fiscal year.
The January 29, 2005 Condensed Consolidated Balance Sheet amounts have been derived from the audited Consolidated Balance Sheet of AnnTaylor Stores Corporation (the “Company”).
During the period ended July 30, 2005, the Company determined that acquisitions of property and equipment on account, which were previously reported as a component of changes in operating assets and liabilities and purchases of property and equipment, should not have been reported in the statements of cash flows. The Company’s financial statements for the six months ended July 31, 2004 have been revised to reflect an increase in cash flows from operating activities with a corresponding decrease in cash flows from investing activities of $2.5 million. Purchases of property and equipment acquired on account have now been presented as supplemental disclosure of non-cash items. This revision has no effect on net income or the amount of cash and cash equivalents reported.
Detailed footnote information is not included in this Report. The financial information set forth herein should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005.
2. Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share assumes the issuance of additional shares of common stock by the Company upon exercise of all outstanding stock options, conversion of all outstanding convertible securities and vesting of unvested restricted stock, if the effect is dilutive.
Quarters Ended | ||||||||||||||||
July 30, 2005 | July 31, 2004 | |||||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Net Income | Shares | Per Share | Net Income | Shares | Per Share | |||||||||||
Basic Earnings per Share | ||||||||||||||||
Income available to common stockholders | $ | 7,139 | 71,907 | $ | 0.10 | $ | 30,087 | 70,358 | $ | 0.43 | ||||||
Effect of Dilutive Securities | ||||||||||||||||
Stock options and restricted stock | — | 601 | — | 1,570 | ||||||||||||
Convertible Debentures | — | — | 381 | 2,794 | ||||||||||||
Diluted Earnings per Share | ||||||||||||||||
Income available to common stockholders | $ | 7,139 | 72,508 | $ | 0.10 | $ | 30,468 | 74,722 | $ | 0.41 | ||||||
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ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
2. Earnings Per Share (continued)
Six Months Ended | ||||||||||||||||
July 30, 2005 | July 31, 2004 | |||||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Net Income | Shares | Per Share | Net Income | Shares | Per Share | |||||||||||
Basic Earnings per Share | ||||||||||||||||
Income available to common stockholders | $ | 24,110 | 71,454 | $ | 0.34 | $ | 61,833 | 69,168 | $ | 0.89 | ||||||
Effect of Dilutive Securities | ||||||||||||||||
Stock options and restricted stock | — | 564 | — | 1,609 | ||||||||||||
Convertible Debentures | — | — | 1,113 | 4,102 | ||||||||||||
Diluted Earnings per Share | ||||||||||||||||
Income available to common stockholders | $ | 24,110 | 72,018 | $ | 0.33 | $ | 62,946 | 74,879 | $ | 0.84 | ||||||
Options to purchase 2,587,100 and 2,685,600 shares of common stock during the quarter and six months ended July 30, 2005, respectively, and 1,348,925 and 1,301,525 shares of common stock during the quarter and six months ended July 31, 2004, respectively, were excluded from the above computations of weighted average shares for diluted earnings per share, due to the antidilutive effect of the options’ exercise prices as compared to the average market price of the common shares during those periods.
3. Share-based Payments
The Company accounts for stock-based awards and employees’ purchase rights under the Associate Discount Stock Purchase Plan using the intrinsic value-based method of accounting in accordance with Accounting Principles Board Opinion No. 25, under which no compensation cost is recognized for stock option awards granted at fair market value and employees’ purchase rights under the Associate Discount Stock Purchase Plan. Had compensation costs of option awards and employees’ purchase rights been determined under a fair value alternative method as stated in SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123”, the Company would have been required to prepare a fair value model for such options and employees’ purchase rights, and record such amount in the condensed consolidated financial statements as compensation expense. Pro forma stock-based employee compensation costs, net income and earnings per share, as they would have been recognized if the fair value method had been applied to all awards, are presented in the table below. The Company is currently evaluating the provisions of SFAS No. 123R, “Share-Based Payment”, and plans to adopt its provisions in Fiscal 2006.
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ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
3. Share-based Payments (continued)
Quarters Ended | Six Months Ended | |||||||||||||||
July 30, 2005 | July 31, 2004 | July 30, 2005 | July 31, 2004 | |||||||||||||
(dollars in thousands, except per share data) | ||||||||||||||||
Net income: | ||||||||||||||||
As reported | $ | 7,139 | $ | 30,087 | $ | 24,110 | $ | 61,833 | ||||||||
Add: Stock-based employee compensation expense included in net income, net of related tax effects | 1,538 | 1,340 | 2,920 | 2,369 | ||||||||||||
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects | (2,061 | ) | (2,117 | ) | (5,596 | ) | (4,548 | ) | ||||||||
Pro forma | $ | 6,616 | $ | 29,310 | $ | 21,434 | $ | 59,654 | ||||||||
Basic earnings per share: | ||||||||||||||||
As reported | $ | 0.10 | $ | 0.43 | $ | 0.34 | $ | 0.89 | ||||||||
Pro forma | $ | 0.09 | $ | 0.42 | $ | 0.30 | $ | 0.86 | ||||||||
Diluted earnings per share: | ||||||||||||||||
As reported | $ | 0.10 | $ | 0.41 | $ | 0.33 | $ | 0.84 | ||||||||
Pro forma | $ | 0.09 | $ | 0.40 | $ | 0.30 | $ | 0.81 | ||||||||
The estimated fair value of each option grant is calculated using the Black-Scholes option-pricing model, with the following weighted average assumptions:
|
| |||||||||||||||
Quarters Ended | Six Months Ended | |||||||||||||||
July 30, 2005 | July 31, 2004 | July 30, 2005 | July 31, 2004 | |||||||||||||
(dollars in thousands, except per share data) | ||||||||||||||||
Expected volatility | 28.6 | % | 29.6 | % | 28.9 | % | 34.3 | % | ||||||||
Risk-free interest rate | 3.0 | % | 1.0 | % | 2.6 | % | 1.0 | % | ||||||||
Expected life (years) | 4.0 | 4.0 | 4.0 | 4.0 | ||||||||||||
Dividend yield | — | — | — | — |
4. Long-Term Debt
During Fiscal 1999, the Company issued an aggregate of $199.1 million principal amount at maturity Convertible Subordinated Debentures due 2019 (the “Convertible Debentures”). In May 2004, the Company notified the holders that it would redeem these Convertible Debentures in June 2004. The holders had the option to convert their Convertible Debentures into common stock of the Company prior to redemption, and, on June 18, 2004, all the Convertible Debentures were converted for an aggregate total of 5.4 million shares of common stock. The conversion of Convertible Debentures had no effect on diluted earnings per share.
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ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
4. Long-Term Debt (continued)
In November 2003, Ann Taylor and certain of its subsidiaries entered into a Second Amended and Restated $175.0 million senior secured revolving credit facility (the “Credit Facility”) with Bank of America N.A. and a syndicate of lenders. The Credit Facility, which, at the Company’s option, provides for an increase in the total facility and the aggregate commitments thereunder up to $250.0 million, matures on November 14, 2008 and is used by Ann Taylor and certain of its subsidiaries for letters of credit and other general corporate purposes. There were no borrowings under the Credit Facility at any point during the first six months of Fiscal 2005 or as of the date of this filing.
The Credit Facility permits the payment of cash dividends by the Company (and dividends by certain of its subsidiaries to fund such cash dividends) if, after the payment of such dividends, liquidity (as defined in the Credit Facility) is greater than $35.0 million. Certain subsidiaries of the Company are also permitted to: pay dividends to the Company to fund certain taxes owed by the Company; fund ordinary operating expenses of the Company not in excess of $500,000 in any fiscal year; repurchase common stock held by employees not in excess of $100,000 in any fiscal year; and utilize the funds for certain other stated purposes.
5. Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs”. This Statement amends the guidance in Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS No. 151 are effective for fiscal years beginning after June 15, 2005. The Company is currently evaluating the provisions of SFAS No. 151 and does not believe it will have any impact on the Company’s Consolidated Financial Statements.
In December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based Payment” (“SFAS No. 123R”) which revised SFAS No. 123, “Accounting for Stock-Based Compensation”. This statement supercedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). SFAS 123R also amends SFAS 95, “Statement of Cash Flows”, to require that excess tax benefits be reported as a financing cash inflow rather than as operating cash flows. Excess tax benefits, as defined by SFAS 123R, will be recognized as an addition to paid-in capital. SFAS No. 123R addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB No. 25 and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of operations. In April 2005, the SEC amended the compliance dates for SFAS No. 123R from fiscalperiods beginning after June 15, 2005 to fiscalyears beginning after June 15, 2005. The Company is currently evaluating the provisions of SFAS No. 123R and plans to adopt its provisions in Fiscal 2006. The Company will continue to account for share-based compensation using the intrinsic value method set forth in APB No. 25 until adoption of SFAS No. 123R.
In December 2004 the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets” (“SFAS No. 153”). SFAS No. 153 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe that the adoption of SFAS No. 153 will have a material effect on its financial condition, results of operations or cash flows.
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ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
5. Recent Accounting Pronouncements (continued)
In December 2004, the FASB issued Staff Position (“FSP”) No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP No. 109-2”). FSP No. 109-2 provides guidance under SFAS No. 109, “Accounting for Income Taxes”, with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income tax expense and deferred tax liability. FSP No. 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. Based upon the Company’s preliminary evaluation of the effects of the repatriation provision, management does not believe it will have any impact on the Company’s Consolidated Financial Statements.
In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143” (“FIN No. 47”). FIN No. 47 requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. FIN No. 47 states that a conditional asset retirement obligation is a legal obligation to perform an asset retirement activity in which the timing or method of settlement are conditional upon a future event that may or may not be within control of the entity. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company is currently evaluating the provisions of Fin No. 47 and does not believe it will have a material effect on its financial position, results of operations or cash flows.
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ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
6. Employee Benefits
The following table summarizes the components of net periodic pension cost for the Company:
Quarters Ended | Six Months Ended | |||||||||||||||
July 30, 2005 | July 31, 2004 | July 30, 2005 | July 31, 2004 | |||||||||||||
(in thousands) | ||||||||||||||||
Service cost | $ | 1,193 | $ | 1,051 | $ | 2,386 | $ | 2,103 | ||||||||
Interest cost | 421 | 298 | 842 | 595 | ||||||||||||
Prior service and interest cost | 57 | — | 113 | — | ||||||||||||
Expected return on plan assets | (478 | ) | (375 | ) | (956 | ) | (750 | ) | ||||||||
Amortization of prior service cost | 19 | 2 | 38 | 4 | ||||||||||||
Amortization of net loss | 376 | 164 | 752 | 328 | ||||||||||||
Net periodic pension cost | $ | 1,588 | $ | 1,140 | $ | 3,175 | $ | 2,280 | ||||||||
While no contributions to the Company’s pension plan are required in Fiscal 2005, as the fair value of plan assets has been greater than the funding obligation, the Company made a contribution of $5.0 million to the plan during the second quarter. The Company will consider future contributions to the plan during the remainder of Fiscal 2005.
7. Securities Repurchase Programs
During the first six months of Fiscal 2005, the Company repurchased 675,000 shares of its common stock at a cost of approximately $16.7 million under the $100.0 million securities repurchase program announced in August 2004. The Company has repurchased a total of 2,775,000 shares of its common stock at a cost of approximately $66.6 million under the August 2004 plan through the date of this filing. On August 18, 2005, the Company’s Board of Directors approved a new $100 million securities repurchase program which replaced the August 2004 program. Under the new program, purchases of shares of the Company’s Common Stock will be made from time to time, subject to market conditions and at prevailing market prices, through open market purchases or in privately negotiated transactions.
8. Other
The Company relocated its corporate headquarters to Times Square Tower in New York City from its former 142 West 57th Street location. As a result of the relocation, the Company recorded a one-time write-off of approximately $9.5 million for lease costs related to the former location. The lease for 142 West 57th Street terminates in September 2006.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management Overview
The Company reported an increase in total net sales of 7.6% for the second quarter of Fiscal 2005, with Ann Taylor down 4.3% and Ann Taylor Loft up 17.7% compared to the same period in Fiscal 2004. For the first six months of Fiscal 2005, total net sales were up 8.7% from the same period last year, with Ann Taylor down 3.9% and Ann Taylor Loft up 19.0%. Total comparable store sales for the second quarter of Fiscal 2005 were down 3.9%, with Ann Taylor down 6.1% and Ann Taylor Loft down 3.2%. Comparable store sales for the six month period ended July 30, 2005 were down 3.5%, with Ann Taylor down 5.5% and Ann Taylor Loft down 2.4%. The decrease in comparable store sales for both periods was primarily due to client dissatisfaction with certain of the Company’s product offerings.
The retail environment remains very competitive. The Company plans to continue its planned store openings using cash flow from operations. Management’s plan for future growth is based on offering clients updated classic merchandise at convenient, accessible, brand-appropriate locations. The Company’s ability to achieve this objective will be dependent on factors such as those outlined in the “Statement Regarding Forward-Looking Disclosures”.
The Company will continue to focus on inventory management and reducing selling, general and administrative costs. Total inventory levels at the end of the second quarter of Fiscal 2005 decreased approximately 3% on a per square foot basis compared to last year. Selling, general and administrative expenses as a percentage of net sales for the first six months of Fiscal 2005 increased 1.3% over the same period last year.
Results of Operations
The following table sets forth condensed consolidated income statement data expressed as a percentage of net sales:
Quarters Ended | Six Months Ended | |||||||||||
July 30, 2005 | July 31, 2004 | July 30, 2005 | July 31, 2004 | |||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Cost of sales | 52.5 | 47.0 | 50.8 | 44.5 | ||||||||
Gross margin | 47.5 | 53.0 | 49.2 | 55.5 | ||||||||
Selling, general and administrative expenses | 45.4 | 42.4 | 45.4 | 44.1 | ||||||||
Operating income | 2.1 | 10.6 | 3.8 | 11.4 | ||||||||
Interest income | 0.4 | 0.3 | 0.4 | 0.3 | ||||||||
Interest expense | 0.1 | 0.2 | 0.1 | 0.3 | ||||||||
Income before income taxes | 2.4 | 10.7 | 4.1 | 11.4 | ||||||||
Income tax provision | 1.0 | 4.3 | 1.7 | 4.6 | ||||||||
Net income | 1.4 | % | 6.4 | % | 2.4 | % | 6.8 | % | ||||
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The following table sets forth condensed consolidated income statement data expressed as a percentage increase (decrease) from the comparable prior year period:
Quarters Ended | Six Months Ended | |||||||||||
July 30, 2005 | July 31, 2004 | July 30, 2005 | July 31, 2004 | |||||||||
increase (decrease) | ||||||||||||
Net sales | 7.6 | % | 21.1 | % | 8.7 | % | 22.0 | % | ||||
Operating income | (79.0 | )% | 40.5 | % | (63.4 | )% | 56.8 | % | ||||
Net income | (76.3 | )% | 43.5 | % | (61.0 | )% | 58.8 | % |
Sales
The following table sets forth certain sales and store data:
Quarters Ended | Six Months Ended | |||||||||||||||
July 30, 2005 | July 31, 2004 | July 30, 2005 | July 31, 2004 | |||||||||||||
Net sales (in thousands) | ||||||||||||||||
Total Company (a) | $ | 508,684 | $ | 472,634 | $ | 985,130 | $ | 905,880 | ||||||||
Ann Taylor | 212,227 | 221,661 | 417,965 | 435,085 | ||||||||||||
Ann Taylor Loft | 245,389 | 208,541 | 468,793 | 393,928 | ||||||||||||
Comparable stores sales percentage | ||||||||||||||||
Increase (decrease) (b) | ||||||||||||||||
Total Company | (3.9 | )% | 7.0 | % | (3.5 | )% | 9.3 | % | ||||||||
Ann Taylor | (6.1 | )% | 0.8 | % | (5.5 | )% | 2.4 | % | ||||||||
Ann Taylor Loft | (3.2 | )% | 18.1 | % | (2.4 | )% | 21.2 | % | ||||||||
Number of Stores | ||||||||||||||||
Open at beginning of period | 756 | 667 | 738 | 648 | ||||||||||||
New stores | 26 | 21 | 46 | 40 | ||||||||||||
Expanded stores | 1 | 1 | 2 | 1 | ||||||||||||
Closed stores | — | 1 | 2 | 1 | ||||||||||||
Open at end of period | 782 | 687 | 782 | 687 | ||||||||||||
Total square footage at end of period (in thousands) (c) | 4,484 | 3,893 |
(a) | Total Company sales includes sales at Ann Taylor, Ann Taylor Loft and Ann Taylor Factory stores, as well as internet sales. |
(b) | Comparable store sales are calculated by excluding the net sales of a store for any month of one period if the store was not also open during the same month of the prior period. A store that is expanded by more than 15% is treated as a new store for the first year following the opening of the expanded store. |
(c) | Unless otherwise indicated, references herein to square feet are to gross square feet, rather than net selling space. |
Net sales increased $36.0 million or 7.6% in the second quarter of Fiscal 2005 over the comparable 2004 period due to the opening of 6 Ann Taylor stores, 77 Ann Taylor Loft stores and 12 Ann Taylor Factory stores since the second quarter of Fiscal 2004. By division, Ann Taylor’s net sales decreased $9.5 million or 4.3%, while Ann Taylor Loft experienced an increase of $36.8 million or 17.6%. The Company’s net sales increased $79.3 million or 8.7% in the first six months of Fiscal 2005 over the comparable 2004 period. For the six month period, Ann Taylor’s net sales decreased $17.1 million or 3.9%, while Ann Taylor Loft’s net sales increased $74.9 million or 19.0%.
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Cost of Sales
Cost of sales is comprised of direct inventory costs for merchandise sold, including all costs to transport merchandise from third party suppliers to the Company’s distribution center. Buying and occupancy costs are excluded from cost of sales. Cost of sales as a percentage of net sales increased to 52.5% in the second quarter of Fiscal 2005 from 47.0% in the second quarter of Fiscal 2004. For the six months ended July 30, 2005, cost of sales as a percentage of net sales increased to 50.8% compared to 44.5% for the same period last year.
Gross Margin
Gross margin as a percentage of net sales decreased to 47.5% in the second quarter of Fiscal 2005 from 53.0% in the second quarter of Fiscal 2004. For the six months ended July 30, 2005, gross margin as a percentage of net sales decreased to 49.2% compared to 55.5% for the same period last year. The decrease in gross margin as a percentage of net sales is primarily due to lower full-price sales at Ann Taylor LOFT and lower margins achieved on non full-price sales at both divisions, largely due to an increase in promotional activity at both divisions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of net sales increased in the second quarter of Fiscal 2005 to 45.4% from 42.4% in the comparable 2004 period. Selling, general and administrative expenses as a percentage of net sales increased to 45.4% for the first six months of Fiscal 2005 compared to 44.1% for the same period last year. The increase in selling, general and administrative expenses as a percentage of net sales was primarily due to the one-time charge related to the relocation of the Company’s corporate headquarters combined with an overall deleveraging of expenses due to the decrease in comparable store sales, partially offset by a decrease in the provision for management performance bonus.
Interest Income
Interest income increased 0.1% in the second quarter of Fiscal 2005 to $2.2 million from $1.3 million in the comparable 2004 period. The increase was primarily attributable to higher interest rates during the second quarter of Fiscal 2005 as compared to the second quarter of Fiscal 2004. Interest income as a percentage of net sales increased to 0.4% for the first six months of Fiscal 2005 compared to 0.3% for the same period last year.
Interest Expense
Interest expense decreased $0.6 million in the second quarter of Fiscal 2005 to $0.5 million from $1.1 million in the comparable 2004 period. This decrease was primarily due to the conversion of the outstanding Convertible Debentures in the second quarter of Fiscal 2004, as discussed more fully below in “Liquidity and Capital Resources”. Interest expense as a percentage of net sales decreased to 0.1% for the first six months of Fiscal 2005 compared to 0.3% for the same period last year.
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Liquidity and Capital Resources
The Company’s primary source of working capital is cash flow from operations. The following table sets forth material measures of the Company’s liquidity:
July 30, 2005 | January 29, 2005 | |||||
(dollars in thousands) | ||||||
Working capital | $ | 384,960 | $ | 343,568 | ||
Current ratio | 2.84:1 | 2.41:1 |
For the first six months of Fiscal 2005, net cash provided by operating activities totaled approximately $75.6 million, as compared to approximately $106.7 million for the first six months of Fiscal 2004. Net cash provided by operating activities during the first six months of Fiscal 2005 primarily resulted from net earnings before non-cash expenses such as depreciation and amortization and an increase in non-current liabilities, partially offset by a decrease in accounts payable and accrued expenses. Cash provided by investing activities during the first six months of Fiscal 2005 amounted to approximately $93.2 million due to the sale of available-for-sale securities, offset by capital expenditures for the opening of new stores and a new corporate office facility. Cash provided by financing activities amounted to approximately $21.7 million, and related primarily to the proceeds from the exercise of stock options, partially offset by the repurchase of shares of the Company’s common stock.
The Company’s investment policy permits investments in auction rate securities which have stated maturities beyond three months but are priced and traded as short-term instruments due to the liquidity provided through the interest rate reset mechanism of 28 or 35 days. Investments in auction rate securities are classified as short-term investments on the Company’s condensed consolidated balance sheets, as they are available to fund current operations.
During the first six months of Fiscal 2005, the Company repurchased 675,000 shares of its common stock at a cost of approximately $16.7 million under the $100.0 million securities repurchase program announced on August of 2004. The Company has repurchased a total of 2,775,000 shares of its common stock at a cost of approximately $66.6 million under the August 2004 plan through the date of this filing. On August 18, 2005, the Company’s Board of Directors approved a new $100 million securities repurchase program which replaced the August 2004 program.
The Company expects its total capital expenditure requirements in Fiscal 2005 will be approximately $175.0 to $185.0 million. The actual amount of the Company’s capital expenditures will depend in part on the number of stores opened, expanded and refurbished. The Company expects to use cash flow from operations to fund its capital expenditure requirements.
A portion of the Company’s Fiscal 2005 capital expenditures relates to costs associated with the June 2005 relocation of its corporate headquarters to Times Square Tower in New York City. As a result of this relocation, the Company adjusted the remaining lives of certain fixed assets to correlate to the expected move, the impact of which was not significant to the results of operations. In addition, the Company recorded a one-time write-off of approximately $9.5 million for lease costs related to the former offices at 142 West 57th Street in New York City. The related lease is scheduled to expire in September 2006.
During Fiscal 1999, the Company issued an aggregate of $199.1 million principal amount at maturity Convertible Subordinated Debentures due 2019 (the “Convertible Debentures”). In May 2004, the Company notified the holders that it would redeem these Convertible Debentures in June 2004. The holders had the option to convert their Convertible Debentures into common stock of the Company prior to redemption, and, on June 18, 2004, all the Convertible Debentures were converted for an aggregate total of 5.4 million shares of common stock. The conversion of Convertible Debentures had no effect on diluted earnings per share.
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Critical Accounting Policies
Management has determined that the Company’s most critical accounting policies are those related to merchandise inventory valuation, asset impairment, and income taxes. The Company continues to monitor its accounting policies to ensure proper application. There have been no changes to these policies as discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005.
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Statement Regarding Forward-Looking Disclosures
Sections of this quarterly report on Form 10-Q, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations, contain various forward-looking statements, made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements may use the words “expect”, “anticipate”, “plan”, “intend”, “project”, “may”, “believe” and similar expressions. These forward-looking statements reflect the Company’s current expectations concerning future events, and actual results may differ materially from current expectations or historical results. Any such forward-looking statements are subject to various risks and uncertainties, including the failure by the Company to predict accurately client fashion preferences; decline in the demand for merchandise offered by the Company; competitive influences; changes in levels of store traffic or consumer spending habits; effectiveness of the Company’s brand awareness and marketing programs; the inability of the Company to secure and protect trademarks and other intellectual property rights in the United States and/or foreign countries; general economic conditions or a downturn in the retail industry; the inability of the Company to locate new store sites or negotiate favorable lease terms for additional stores or for the expansion of existing stores; lack of sufficient consumer interest in the Company’s Online Stores; a significant change in the regulatory environment applicable to the Company’s business; risks associated with the possible inability of the Company, particularly through its sourcing and logistics functions, to operate within production and delivery constraints; the impact of quotas, and the elimination thereof; an increase in the rate of import duties or export quotas with respect to the Company’s merchandise; financial or political instability in any of the countries in which the Company’s goods are manufactured; the potential impact of natural disasters and health concerns relating to severe infectious diseases, particularly on manufacturing operations of the Company’s vendors; acts of war or terrorism in the United States or worldwide; work stoppages, slowdowns or strikes; the inability of the Company to hire, retain and train key personnel, and other factors set forth in the Company’s filings with the SEC. The Company does not assume any obligation to publicly update or revise any forward-looking statements at any time for any reason.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The market risk of the Company’s cash and cash equivalents as of July 30, 2005 has not significantly changed since January 29, 2005. Information regarding the Company’s financial instruments and market risk as of January 29, 2005 is disclosed in the Company’s 2004 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company has conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report (the “Evaluation Date”). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s reports filed or submitted under the Exchange Act.
There was no change in the Company’s internal control over financial reporting during the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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The following is an update relating to the purported class action litigation in California involving the Company as previously disclosed under Item 1 of Part II of the Company’s Form 10-Q for the quarter ended April 30, 2005.
The second purported class action which, as previously reported, had been filed in San Francisco County Superior Court on May 5, 2005, was served against the Company on June 15, 2005. The Company and plaintiff’s counsel in this second action have agreed to take the steps necessary to seek approval by the Los Angeles Superior Court to consolidate this suit with the first purported class action filed in such court on February 15, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth information concerning purchases made by the Company of its common stock for the periods indicated:
Total Number of Shares Purchased (a) | Average Price Paid Per Share | Total of Publicly | Approximate of Shares that May Yet | |||||||
(in thousands) | ||||||||||
May 1, 2005 to May 28, 2005 | 10,683 | $ | 24.96 | — | $ | 42,744 | ||||
May 29, 2005 to July 2, 2005 | 375,538 | 24.86 | 375,000 | 33,422 | ||||||
July 3, 2005 to July 30, 2005 | — | — | — | 33,422 | ||||||
386,221 | $ | 24.86 | 375,000 | |||||||
(a) | Includes 11,221 shares of restricted stock repurchased in connection with employee tax withholding obligations under employee compensation plans, which are not purchases under the Company’s publicly announced Plan. |
(b) | These shares were part of a $100.0 million securities repurchase plan, announced by the Company in August 2004. On August 18, 2005, the Company’s Board of Directors approved a new $100,000,000 securities repurchase plan. This plan replaced the August 2004 plan and will expire when the Company has repurchased all securities authorized for repurchase thereunder, unless terminated earlier by resolution of the Board of Directors. |
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Exhibit Number | Description | |
3.1 | Bylaws of AnnTaylor Stores Corporation, as amended through August 18, 2005. Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K of the Company filed on August 24, 2005. | |
10.1 | Deferred Compensation Plan of AnnTaylor Stores Corporation, as amended through August 18, 2005. Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K of the Company filed on August 24, 2005. | |
10.2 | Form of Indemnification Agreement. Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K of the Company filed on August 24, 2005. | |
10.3 | Trademark Licence Agreement, dated August 2, 2005, between Ann Taylor and Guangzhou Pan Yu San Yuet Fashion Manufactory Ltd. Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K of the Company filed on August 8, 2005. | |
*31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed electronically herewith. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AnnTaylor Stores Corporation | ||||
Date:August 29, 2005 | By: | /s/ J. Patrick Spainhour | ||
J. Patrick Spainhour | ||||
Chairman, Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
Date:August 29, 2005 | By: | /s/ James M. Smith | ||
James M. Smith | ||||
Executive Vice President, | ||||
Chief Financial Officer and | ||||
Treasurer | ||||
(Principal Financial Officer) |
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Exhibit Number | Description | |
3.1 | Bylaws of AnnTaylor Stores Corporation, as amended through August 18, 2005. Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K of the Company filed on August 24, 2005. | |
10.1 | Deferred Compensation Plan of AnnTaylor Stores Corporation, as amended through August 18, 2005. Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K of the Company filed on August 24, 2005. | |
10.2 | Form of Indemnification Agreement. Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K of the Company filed on August 24, 2005. | |
10.3 | Trademark Licence Agreement, dated August 2, 2005, between Ann Taylor and Guangzhou Pan Yu San Yuet Fashion Manufactory Ltd. Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K of the Company filed on August 8, 2005. | |
*31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed electronically herewith. |
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